Noble Group

Kim Eng on 8 Aug 2012

Expecting a soft 2nd quarter. Noble is announcing 2nd quarter results next Monday 13th August. We are expecting some weakness in operating numbers due to the difficult environment, but that should not be a major surprise to the market. Recurring net profit should come in the lower end of its recent normalized quarterly run-rate of USD130- USD150m, though that will be padded by gains on the Yancoal deal.

But to be padded by gains from Yancoal deal. The Yancoal- Gloucester Coal deal was completed during the quarter, which should reflect in a one-off profit gain of about USD200m. This by itself should provide a marginal 5% uplift to book value/ share, which stood at US74 cents/ share last quarter. Further to that, the capital distribution of some USD400m should come in handy for Noble which appears to be on the opportunistic M&A mode again for value assets.

Weakness in coal market. Both the coking and thermal coal markets have experienced significant weakness in 2012, due to factors such as slower demand from key Asian markets like China as well as a shift to cheaper natural gas in the US. While this would have been a more significant negative impact for Noble normally, it is mitigated by the consolidation of its ASX-listed subsidiary Gloucester Coal merging into the bigger Yancoal. The latter is in the stage of ramping up production aggressively on reserves, which should be supportive of growth.

Brazilian sugar may be hampered by bad weather. One of the factors which pulled down Q1 profit was the first time consolidation of cost at its two new sugar mills in Brazil (Q1 has no harvest). However, wet weather continues to hamper production since then, with output down 29% yoy according to Unica. As a result, production is now likely to peak only in the 2nd half of the year, which may result in a slight drag on 2nd quarter earnings. In the agriculture sector, Soybean crushing margins, which has historically been an important factor in Group earnings will likely continue to be soft due to overcapacity in China.

Maintain BUY. We adjust our FY12-FY14F earnings downward by 7- 10%. With a lack of earnings visibility for commodity traders at the moment, we continue to use a book-value based TP of SGD1.42 (1.5x P/B, 1 standard deviation below 5-year mean). Maintain BUY.